Friday, September 5, 2008

Why Gordon Brown has got it wrong on the British economy

Why Gordon Brown has got it wrong on the British economy

Gordon Brown says he is 'cautiously optimistic' about the economy. But indicators are at record lows and our banking system is being propped up by the Bank of England. The only way out, is the hard way.

Posted by damien @ 11:34 AM (1370 views)
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18 thoughts on “Why Gordon Brown has got it wrong on the British economy

  • “Gordon Brown says he is ‘cautiously optimistic’ about the economy.”

    But what Gordon Brown fails to appreciate is that he is a [email protected]

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  • seconded

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  • An excellent article which lays out where we are in black in white. Speaking for myself I ran into financial difficulties in 2003 and did as suggested i.e. stop spending, eradicate my debts and start saving. As for buying another house well, I’m waiting, watching AND saving…

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  • “The only way out of this recession is the hard way. We need to rebuild our savings and pay down our debts. That takes time”.

    It looks like it’s going to take a switch from going shopping (our current economy) to doing something useful (most other economies). It isn’t just making stuff, but we can’t just import everything and sell virtually nothing (goods or services) back.

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  • John Sepek says:
    ….“which rotund oaf would you rather see running Britain – Clarke or Brown?” might make a good many people think “gosh, things really could be worse, after all.”

    I’ll put up with a rotund oaf…I just want the economy run properly. I don’t want us to follow the USA by bringing in “centrefolds” or beauty queens to run the country!

    I don’t feel there is a place for optimism in the UK economy, right now. As Clarke says to Brown: “do something constructive or go with honour” .

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  • On the bright side, if this country does start manufacturing things again, due to our education system we now have a large poorly educated unskilled population who will slip easily into working long hours in factories sticking heads on dolls.

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  • True! Also input prices are zooming upwards, so there might actually be a margin available in producing things here – especially if oil stays high short & medium term and gets higher longer term.

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  • Nice one, inbreda.

    I keep looking at your [email protected] and laughing out loud. Quite made my day.

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  • When he says he is “cautiously optimistic” is that the same as “I won’t let the property market go through the boom & bust cycle again”

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  • eyeoftheweasel says:

    It annoys me the way a cheap pound gets reported as good news for exporters, for the following reasons:

    1. What significant exports does the UK have these days? (Financial services perhaps?)

    2. Why do these reports never factor in the fact that a cheap pound will make imported raw materials more expensive, so before long many of these supposedly happy exporters will end up having to increase their prices? That will negate at least some of the benefit of reduced prices for their goods in overseas markets, and could also cost them dear in any domestic sales.

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  • eyeoftheweasel says:

    Forgot to finish that. So yes, in response to beartil2010’s comment, yes maybe we will start producing useful goods and services again, reopen the mines, and turn new-build estates back into agricultural land.

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  • still renting says:

    @eyeoftheweasel

    In 2007, UK exports totalled £360 billion. Exports of goods (excluding oil) were £198 billion. Exports of services were £140 billion.

    We’re not the world’s biggest exporter, and we’re certainly running a trade deficit at the moment, but the weakening pound will boost exports and reduce demand for imports.

    As for reopening the mines, how do you expect UK mines to compete with Russian and Chinese mines where labour is cheaper, environmental and safety standards almost non-existant and economies of scale are much greater? Or are we tax-payers supposed to subsidise them?

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  • Dear Gordon,

    Let me explain why so few share your optimism, however cautious that may be, about the UK economy. After successive Labour defeats you and Blair decided in the mid-90s that you had to woo London and the south east in order to win an election. To do this an expansion of the City, and the spinoff benefits to prosperity and house prices in the region, was required. You steered more foreign direct investment to the region. Your deregulation and tax breaks to big investors and private equity would attract billionaires, enhance the financialisation of the economy and wealth capture (not creation) by bankers and fund managers and generally tap into the profits of globalisation.

    You caused the UK to be a leveraged bet on the world economy (or, rather, on the richest tenth of 1% of the world’s population) and you claimed that the resulting concentration of wealth, through enhancing GDP, was good for everybody (when in fact median incomes were stagnating and vast inequalities in wealth were growing).

    All that happened was that you rode the big asset and bond bubble that’s been around for most of the time since Volker at the Fed killed inflation by high interest rates in the early 80s and Thatcher & Reagan deregulated financial markets and paved the way for new financial instruments. It’s been a time largely of a bull market in bonds (high bond prices / low yields, low spreads between risk-free and risky debt), low inflation expectations and high returns on financial assets.

    For a while the City and Wall Street had so much liquidity and leverage that they could create many jobs and more income than manufacturing and other services. But they operated inside an unreality capsule, insulated from the outside world, self-referential and made up of mutually reinforcing parts. For example, easy loans to risky companies because of low default rate, low default rate because of easy loans (since companies in trouble could re-finance, pay interest in paper instead of cash, push payments further into the future etc.) Lending to bad credit risks was systemic. People borrowed to do bigger deals and make real income along the way. The worst effect of financialisation was that other industries were burdened by the requirement to produce the same returns as those made in the financial sector and were therefore forced to cost-cut, downsize, be privatised, offshored, merged, acquired, private equitied….or dismantled – activities which further enhanced financial services largesse.

    Now the game’s up. Bond yields are way up because of grave concerns about bank balance sheeets, rising default rates and a deteriorating world economy. Spreads (the difference between no-risk and risky debt) have recently reached their highest level in the US since the early 90s and are at 10-year highs in Europe and Asia. Fannie & Freddie are forced to pay record high-risk premia on $-denominated bonds. The City now has nothing to offer – trading real things, or virtual products kinda backed by real things – has become no more profitable than making things. But making things is what’s been downsized, offshored, dismantled etc., i.e. cannibalised by the financial services sector.

    The geared bet on the world economy is unwinding and there’s no Plan B because the financialisation you unleashed has made the rest of the economy small and uncompetitive.

    So please don’t insult our intelligence by telling us that the economy is sound.

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  • Eyes_wide_open says:

    Our weak economy will boost exports?

    Exports of what? Girls Aloud CDs?

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  • icarus, #12. …. I’ve been watching this site for 12 months, that’s the best post I’ve seen! A great summary of how the UK economy has changed in the last 20 years and how we’re in for a few years of ‘reckoning’. Thanks!

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  • The exchange rate fall will help exporters and inward investment. Its what saved us in the early nineties.
    I used to like Moneyweek but its starting to get things wrong on a regular basis ie Japan, and lately, gold and commodities.
    I think its becoming obsessed with its return to gold standard/slash government expenditure/kick out Labour agenda.

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  • It’s interesting to note the two opposing sides in the economic assessments we are getting at present. Martin Wolf in the FT was reporting Morgan Stanley’s view that things are not so bad as the 80s or 90s, although the only reason of any substance given is the one about no sudden jump in interest rates, and inflation being much lower now. Well, base rates have gone from 3.5 to 5.75%, which would mean a 64% increase in payments on a debt between these rates. Still a fair jump, even if not particularly sudden. Low inflation also means debts hang around much longer, and debt is the big problem at present.

    Wolf also says that falling house prices do not destroy wealth. But the supply of cheap credit and the resulting bad loans do. Look at all the houses in America that are going to ruin as they stand empty after their owners surrender the house they can’t afford to repay the mortgage on. It is not just a matter of oversupply: they end up living in tents. What most certainly happened is transferral of wealth through financial mechanisms that do not create anything, except inequality, which no one suggests is a prerequisite for a thriving economy.

    Politicians will always talk more and more rubbish as they get into more and more trouble. Kafka would recognise this.

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  • Amos @16, agree re Moneyweek. I like the way they rubbish the government and property market, but they do bang on about the same thing over and over and as you say have got several things wrong lately. I nearly cancelled my subscription a few months ago when I saw Merryn’s article about how Northern Rock shareholders should take priority over depositors, unbelievable!

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